We’ve been saying ‘global supply chain’ for decades, but since 2020 we’ve really understood the concept. There have been previous bumps in the road, including petrol prices which regularly have an impact on international supply chains, but the recent perfect storm of challenges has led to outcomes that nobody predicted. These challenges, including shortages on shelves, panic buying, labour issues and even wars, have all had drastic impacts on the warehousing sector and they aren’t over. So what can be done to manage current and future issues? Viewing logistics strategically, reassessing cost centres and exploring how current challenges can be turned into advantages are all part of recognising how the global supply chain has changed, and what benefits are available from that change.
Space, space space
It used to be location, location, location, but warehouse space has become a major issue for a whole slew of reasons:
• Stockpiling (and attempts to manage panic buying) during the pandemic led to certain sectors requiring more space and for longer. Shortages are still commonplace, especially in the construction industry
• Scarcity – where’s there’s demand, there’s usually supply, but due to the pandemic, construction of new warehousing has been limited and many developments are mothballed
• Finance issues – again, scarcity traditionally pushes up prices, and this price hike, alongside the increased demand from consumers for delivery-on-demand, has put pressure on many sectors who are being priced out of their current warehousing and can’t find new locations.
Solutions here include exploring third party logistics (3PL) solutions to streamline your own processes and reduce the financial load in the middle of the process (warehousing, picking and packing and delivery) and looking at flexible warehouse rental as a strategic investment rather than a short-term solution.
Expectation versus delivery
There’s little doubt that the massive increase in online shopping is here to stay. However, what’s not so clear is how warehouse space demands will be met. Many sectors have had to redesign their strategy – and their warehousing network – more than once to cope with new logistics processes that are moving more goods, more quickly, from warehousing to consumer. This reactive model isn’t sustainable and organisations need to think in the longer term … where is their customer base now and where will it be in five years, what does that mean for logistics, can a centralised distribution system meet need or does the new model of multiple storage locations, pallet storage close to urban centres and a focus on 24 hour delivery work better? Picking, packing and delivering are becoming more important at pretty well the same rate that physical experience of goods is becoming less so. People care less about being able to see and touch potential purchases and more about being able to have this purchases in their homes speedily.
For many organisations this is squeezing the traditional margin given to delivery – one drastic solution has been for retailers to scale back on their bricks and mortar presence to expand their delivery function. Many organisations are now looking how the costs of online retailing can be better shared with consumers, but few consumers are yet aware that their “pandemic purchasing” boom is not sustainable. New financial models will emerge, but before they do, the growing wave of customer frustration with delayed deliveries, exacerbated by Brexit issues, is likely to make warehousing and logistics real pinch points in the UK.
The return conundrum
One very specific issue in the delivery process is the completely unexpected way that consumers have taken the free return model as the baseline for shopping online. Recent research shows that return rates in the UK range between 5% and 50%, but few retailers are factoring that level of return into their costs. It’s not just the cost of returns, but the scale, that is unprecedented – retailers in clothing in particular report that customers may order up to eight garments, knowing they will return seven. Significantly, customers who do this are doing it every time they purchase online, which adds a huge cost burden to every purchase, although this is rarely recognised and properly costed throughout the supply chain.
Returns management, or ‘reverse logistics’ is crucial to success in this area, and it requires a clearly focused approach. Large companies are using their returns policy to differentiate themselves from competitors by giving it a separate cost centre and using their returns strategy to drive market share. Some choose to integrate their returns with their delivery policy, thus optimising their ability to route drivers to do local pickups alongside scheduled deliveries, others outsource returns altogether, (eg using the Post Office) thus allowing them to manage costs rather than overseeing processes. Outsourcing also removes another problem – the need to increase capacity over holiday periods when there is always a surge in both purchasing and returns. However an organisation chooses to handle returns, being explicit about policies both with consumers and with partners in the supply chain is essential to giving people confidence and clarity.
Managing labour costs
Warehouse rental is often seen as a major overhead, but actually that’s a mistaken perception. The cost of labour is generally around 30-40% of the overall cost of the warehouse function, renal is usually between 5-7%. This means that focusing on rent costs rather than workforce costs can substantially mislead an organisation about its warehousing function. But costs are not the only consideration – between COVID-19 and Brexit, labour shortages are likely to be a significant factor in managing warehousing effectively. This has been exacerbated by the war in Ukraine, which has affected supply chains worldwide and led to substantial delays in transportation of containerised goods moving from China and Russia into Europe.
When establishing a warehousing operation, or looking at current warehousing, it’s going to be vital to explore the availability of a local workforce or examine the potential for automated processes that might reduce the demand for personnel. The flexibility of warehouse rental can be an advantage here – short term contracts mean that companies can relocate their warehousing according to need, whether that’s customer demand, supply chain issues or labour supply.